4 Lessons You Can Learn From Bill Ackman

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 |  Includes: APD, HLF, JCP
by: Quoth the Raven

Bill Ackman - Rogue Gambler or Steadfast Manager?

Hedge fund manager Bill Ackman has found himself all over the news in 2013. Ackman, who founded and is currently the CEO of Perishing Square Capital management, is one of the most followed and reported on hedge fund managers of recent memory, namely due to his involvement in creating headlines for Herbalife (NYSE:HLF), J.C. Penney (NYSE:JCP), and battling his arch nemesis, billionaire Carl Icahn publicly.

Ackman, a graduate of Harvard, got his first blip on the radar when he started to challenge MBIA's "AAA" rating in 2002. At this time, his trading was being probed and watched by federal organizations - but he carried on anyway. Ackman argued that credit default swap protection that MBIA had sold against mortgage backed CDOs would be detrimental to the company. Ackman pointed out that MBIA was restricted from trading CDS and that in turn, they were doing it through a second company.

Ackman put his money where his mouth was when he bought credit default swaps against MBIA's debt, essentially betting that MBIA would crash. After the crisis of 2008, Ackman sold the swaps and cashed major profits. Ackman officially covered his short position as per the 13D filed on January 16, 2009.

Ackman has been in the spotlight this year after, in December 2012, he issued a report that was extremely critical of Herbalife's MLM (multi level marketing) model. Ackman went as far as to publicly call the company a pyramid scheme.

Shortly thereafter, Carl Icahn (with whom Ackman has a less than stellar relationship) disclosed an enormous stake in Herbalife, essentially pinning the two against one another over the life of Herbalife as a company.

After this all came to light, Ackman and Icahn appeared on CNBC's Fast Money, hurling insults and attacking each other while Wall Street faithful cheered them on, hooting and hollering in response to their conversation from the NYSE exchange floor, audible in the background. CNBC reported:

The battle began with a phone interview with Ackman alone, who was responding to attacks by Icahn the day before over Ackman's claims that Herbalife is a "a well-managed pyramid scheme."

"Our goal here was to shine a light on Herbalife," Ackman said on "Fast Money." "Frankly, Carl did me a favor by picking on me."

Icahn quickly called in to the show and struck back.

"Ackman is a liar," he said. "He's got one of the worst reputations on Wall Street."

The two managers went after each other for a while, but things started to calm down in the following months - until Herbalife crushed earnings recently, control of J.C. Penney's board was swept from under him, and his fund disclosed a new monster position heading into the second half of 2013. Here's some of the "need to know" information on Bill Ackman's 2011-2013, with source material for further reading.

Bill Ackman's Recent Happenings at a Glance

  • 2011 - Ackman pushes for Ron Johnson to be hired as CEO of J.C. Penney, where Ackman sits on the board.
  • 12/20/12 - Ackman discloses his monster short position in Herbalife, calling company a pyramid scheme
  • 1/10/13 - Herbalife CEO casts doubt on Ackman's motives for shorting and calling company a pyramid scheme.
  • 1/25/13 - Icahn and Ackman slam each other on Fast Money, Ackman calmly presenting his arguments and Icahn belligerently spewing out curse words.
  • 2/14/13 - Icahn's 13D discloses a monster 13% position in Herbalife, shares immediately rocket 20% in after-hours trading.
  • 2/15/13 - Ackman responds and calmly reaffirms his short position in the company.
  • 2/28/13 - Ackman, who has a 18.11% stake in J.C. Penney, reportedly loses $150 million on J.C. Penney's disastrous earnings. Ackman sticks to his plan to revamp J.C. Penney under the leadership of Ron Johnson.
  • 4/9/13 - Ackman concedes management mistakes at J.C. Penney, claiming they had the right "big ideas" but couldn't execute.
  • 5/2013 - It is reported that Ackman has lost his "sway" over the Board at J.C. Penney, but remains long with his 18% stake in the company.
  • 7/30/13 - Herbalife releases great earnings, shooting the HLF stock price through the $60's. Ackman still raising questions about Herbalife, despite losing almost $300 million on paper from his short position thus far.
  • 7/31/13 - Ackman, seemingly trying to out-do himself again and shake off his disappointing year, announces his funds' largest investment ever, entering into a 9.8% stake in Air Products and Chemicals (NYSE:APD), a producer of gases used in industry. The value of the investment is $2.2 billion.

Here's how Herbalife has fared, since Ackman's original short thesis in 12/12:

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And, here's how J.C. Penney has fared since Ackman convinced the Board to have Johnson take the reins in 2011:

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Investing Lessons You Can Learn From Ackman

As you can see, in addition to Herbalife, Ackman has been involved in failing retailer J.C. Penney in 2012 and 2013. I've spent the better part of the year following a lot of Ackman in the news, and while I don't always agree with some of the moves he's made (namely with JCP - as you can read here), I respect his style and think that there's a couple lessons the average retail investor can learn from Ackman.

I'll contend there's lessons you can learn here, even on the heels of Ackman's less than stellar year. So, without further ado, here's 4 lessons you can you learn from Bill Ackman, corresponding with a couple of selections from "My Definitive 17 Cardinal Rules for Investing Success":

1. You Can Be Down, But Not Out

This is a newer rule that I really like. Being a former poker player during my time in the service, there's a couple of analogies that transfer over from his statement to Ackman's style.

"A chip and a chair is all you need," is a common poker expression. It means, basically, that all you need is a little powder to take your swings with, and you're still in the game and have potential. Ackman's a great example of this - sure, he's dropped a couple hundred million on paper (and who doesn't have that lying around the house?), but he's still out there, taking his swings, and is still headline material when he does make a move.

A perfect example of this is an investing friend of mine, who I watched years ago turn his last $500 into $50,000 over the span of just a few short years. Is it extremely difficult to do? Yes. Is it impossible? No.

2. Keep Your Head, Stay Persistent, Don't Trade on Emotion

One thing you can say about Ackman after the past few months is that he's kept his head. As a matter of fact, it seems to be one of the things that Carl Icahn hates the most about him. During their CNBC interview, Icahn alluded to a statement similar to, "no one is more sure of Bill Ackman than Bill Ackman." I don't know about Bill, but I'd take this as a compliment. His trading style is steadfast and classy. This is because Ackman knows how to separate emotion from his trades, one of my other cardinal rules of investing.

Emotion is what prevents real success for many novice traders. Emotion is the catalyst behind making trades that make no sense on paper. Emotion is why people sell off positions after the crash and why they begin buying at the tail end of rallies. Emotion makes idiotic things run through your head, like:

"This stock may never stop going up! Better get in no matter what cost!"

And conversely:

"This company is doomed! We are going to zero right here, right now, on this crash!"

This may seem like idiocy when you read it now, but even the savvy investors know this voice still comes out in their head when they're in the midst of a rally or crash. Ackman is showing a great example how to ride out emotional situations with resolve and class over the last few months.

During his CNBC interview with Icahn he was cool and collected, while Icahn (who has enough money to do whatever the hell he wants) looked like the maniac; screaming, cursing, interrupting, and generally making himself look like a baby.

Moving onto Ackman's Herbalife trades, as I've often said, you need to know when to "chase" and when to not "catch a falling knife". Ackman not covering his Herbalife short shows that he's steadfast in "chasing" based on his fundamental analysis. Some call it insanity, I call it extreme confidence.

3. Do Your Due Diligence to the "nth" Degree

"If you don't study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards."

- Peter Lynch

Man, there's one thing you cannot say about Bill Ackman and that is that he doesn't do his due diligence. As ValueWalk reports, Ackman did insane due diligence while doing his investigation of MBIA:

Bill Ackman read through 140,000 pages (no typo), while investigating MBIA. This story shows how much due diligence Ackman does as an investor. The stock reached a high of over $70 in 2007 and went as low as ~$2.50 in early 2009.

His story has been similar with Herbalife. Although down on his investment, his press releases and presentations show that he has unrelenting command and mastery of the inner-workings of the companies that he invests in, one way or another.

No matter what company you're invested in, remind yourself that by holding a position in that company you are taking ownership of a certain percentage of the company. Similarly, take ownership of your investment by doing as much due diligence as legally available.

Pride yourself on furious, unrelenting due diligence. Crunch the numbers, then crunch them again. Then again. Use the products the company makes, visit headquarters if they offer tours, and utilize investor relations to get editorialization on filings and things you may have questions about. Those resources are there for you as an investor, and being scared to use them results in you missing out on potentially important information.

4. Trust Yourself and Your Decisions

At the end of the day, time is going to tell the tale for Ackman stacking up against some of the greatest investors of our time. The most important thing I've learned as an investor is to trust myself and my decisions; something that Ackman seems to have absolutely no trouble with.

Some people would write it off that he's a gambler, but as someone that's been through the thick of things several times as an investor, I see Bill Ackman as a man of resolve in class.

Conclusion

I didn't agree with Bill Ackman on J.C. Penney, but do still agree with him on Herbalife. As stated before, this isn't about his decisions as a trader, it's about why I respect him and what you can learn from him. Regardless of your stance on Ackman as an investor, I hope that these four lessons can compliment what you already know as an investor and provide some perspective for future trading strategies.

"Fortune favors the bold."

-Latin proverb

As always, best of luck to all investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.